Google’s continuing growth and potential for a cash return bullseye
Three months ago I wrote that:
‘Google has a high quality problem: its bundle of net cash is growing and the introduction of a new CFO in a month’s time provides the opportunity for some new thinking.
In a year’s time Google is going to either be paying a dividend or buying back stock - or maybe both. And this is going to attract a whole new set of investors. It certainly has not been an evolution that has held back Apple’s stock over the last few quarters…’
Thursday’s after hours numbers were simply stunning in particular the free cash flow generation which again hit another new high. Even factoring in the strong after hours performance of the stock the free cash flow generation came in at a cool 4.7% annualized yield. There is a lot you can do with such cash flow - especially if you already have over US$90bn of cash on the balance sheet - and with the new CFO mentioning twice the notion of ‘maximising stakeholder value’ on the conference call I strongly reiterate my earlier call on the paying of a dividend or buying back stock (and maybe both). Yesterday’s coy comment of it being ‘premature…to gauge how capital return fits in’ is unlikely to be repeated beyond the end of this year.
Source: Google quarterly report
So what drove this mega cash flow and is it sustainable?
The key comment from yesterday’s conference call was that Google ‘continued to close the gap between mobile and online search monetisation’. We all know that mobile advertising is a huge theme with - as shown below - considerable growth potential but Google has struggled to encourage advertisers to pay the rates available on desktops.
This is changing. First the gap between the number of paid clicks and the cost-per-click continued to widen. Second - and even more importantly YouTube continues to ramp with video ads up 40% year-on-year and the spend for top advertisers up 60%.
Video is a huge growth area. Ericsson noted in their most recent Mobility Report that not only is prospective data growth strong but that video represents the clear majority of this increase.
Source: Ericsson Mobility Report
Yes, it is worth reiterating one of the points above: ‘60% of all mobile data traffic will be from video by 2020...it will grow by 55% annually during this period’. This theme will underpin Google’s stock for the next few years.
Growth and cash return potential: that’s a combination with elements that will please almost all investors. Google shares may have tacked sideways for much of the year or so but the sharp break up after hours yesterday is likely to be a better guide for the future.
Chris Bailey is the Founder of Financial Orbit Limited. More of his views can be found at www.financialorbit.com or on Twitter @financial_orbit
Bullseye image sourced from here